The Azimuth Project
Discount rate

Discount rate

Idea

In performing analysis or planning, one is often faced with comparing “events” occuring immediately with events occurring at some time in the future. For various reasons (see below), the same event occuring at different times in the future may have different “importances”. The very general term discount rate is a multiplicative factor used to form comparable importance values for events at different times. (Specific fields often have their own specialisations of the term referred to as the discount rate.)

Details

One often considers alternatives which consist of events occuring at different times in the future (including “imminently”). The importance of these events often varies depending upon when they occur. Events’ “importances” are often monetary (e.g., is it better to receive 100 million dollars now or 105 million dollars after one year?) but can be other quantities, e.g., some toy examples are:

Some of the phenomena that contribute to a choice of discount rate are:

These are all “intellectual reasons” for a discount rate. There is strong evidence that human psychology has an inherent preference for immediate reward over reward in the future, leading to actions which discount the future.

This could certainly be written much better. Unfortunately wikipedia only refers to very narrow examples of discount rate – DavidTweed

Note that this use of the general term discount rate does not refer to the use in economics of the term to denote adjusting for predicted inflation to obtain a measure of currency which has constant “value”. This is something that is often needed in analysis, but the use of the term here is to compare things which have genuinely different impacts depending when they occur.

Disputes over the discount rate used in analyses

Many analyses, particularly for environmental issues, come to conclusions about the best course of action based upon use of discount rates. Frequently these plans are criticised based upon the discount rates used (or rather, the assumptions those discount rates embody are criticised). In particular,

Examples of disputed discount rates include those in the Stern Review (cf. Azimuth’s page Stern review) and those for Lomborg’s Copenhagen Consensus reports.

References

TODO: find references to generalised discount rates.

A general discussion, including a section on discount rates:

category: methodology